Posted On: 26-June-2021
With increasing availability of credit through formal channels, the affordability of homes has seen a rise. The importance of credit score for home loans, however, cannot be neglected. Let us understand in this article, the basics of What is Credit Score, How Credit rating/score is calculated, credit rating agencies in India, etc.
What is a Credit Score?
A Credit Rating and Credit Score determines the creditworthiness of a business or an individual, respectively. The Credit Score is an important indicator stating whether the borrower has defaulted the payments against previous loans and whether he is trustworthy to avail any further loans. It is also an indicator which makes or breaks a borrower’s loan application.
How is the Credit Score calculated?
The creditworthiness of borrower, an individual or a company, is determined based on the past transactions of borrowing or lending. It is determined after weighing the statements of liability and assets, and their ability to meet their obligations.
It is recommended that you maintain a credit utilisation ratio of below 30% for easier approval of loans and borrowings. The credit score is calculated based on the following factors:
What is a Credit Rating Agency?
A credit rating agency evaluates the creditworthiness of an individual or company by assessing his repayment regularities and liabilities. There are a number of credit rating agencies in India like CRISIL, India Ratings and Research Ltd, Brickwork Ratings India Pvt Ltd, ICRA Ltd, CARE, Infometrics Valuation and Ratings Ltd. All of these agencies are SEBI-registered. The Securities and Exchange Board of India is the government authority that reserves the right to register and regulate the credit rating agencies in India.
How do Credit Rating Agencies work?
Credit rating agencies analyse the credit preparedness of a company or an organisation, an individual or an entity and assign ratings to them. They have the authority to rate non-profit organisations, state governments, local government bodies, special purpose entities and companies.
Many factors are considered while settling with a rating such as financial statements, type of debt, lending and borrowing history, repayment capability, past credit repayment behaviour, etc. Every one of these factors contributes to calculating the credit score.
The credit score is not the final factor upon which the credit is provided. It only acts as an indicator of previous credit clearance behaviour of the individual or entity to the financial institution. Other factors such as mortgage, surety, and other assurances act as the parameters for lending.
This input only makes it easier on the financial institution for making an informed decision.
Why is Credit Score important?
A credit score is important for borrowers as it acts as the indicator of their repayment capabilities and helps them in acquiring home loans and personal loans in India. Lenders like public sector and private sector banks in India consult the credit report to approve or reject loan applications.
A low credit score can make it difficult to avail a loan from anywhere in India. Though they may get a loan, the home loan interest rates may be high and the repayment terms may be stringent.
A good credit score can bring a lot of exemptions along with the approved loan like low interest rates, longer repayment term, overdraft facilities, etc.
What is a good Credit Score?
The credit score is a 3-digit number ranging from 300-900, 350 being the lowest and 850 being the highest. An ideal CIBIL Score for home loans is 700 and above. The closer you are to 900, the better are the chances of your loan getting approved.
Moreover, a good credit score means a lot of benefits like larger loan amount, overdraft facilities, longer repayment terms, lower interest rates, simpler documentation. Also, you can avail 80% of the property value as loan amount, if the credit score is higher.
If you want to apply for a home loan in India, without the fear of being rejected, your credit score will play an important role. The lender banks check your credit score to evaluate your preparedness to repay the loan. A good credit score, preferably above 750, will ensure further scrutiny of your application and finally allotment of the required loan amount.
On the other hand, a low credit score may play a role in immediate rejection of your loan application. Even if by some luck you are sanctioned the loan, the amount may be lower than requested, with shorter repayment period and stringent terms & conditions.
How to improve low Credit Score?
Here are some basics for you to know about improving a low credit score:
The Credit Score as given by the many rating agencies is only an indicator of your credit preparedness. A low credit score can be improved by regular repayments and better borrowing schedules. Beware of your borrowings and spendings, keep an eye on your expenses. This way you will be able to improve your credit score and avail home loans at low interest rates and personal loans in India with longer repayment periods.
Stay Aware, Make better Choices!!
1. What is a good CIBIL score for a home loan?
A good CIBIL score for a home loan must be above 700. A lower score will may result in an application rejection or a loan at a higher interest rate.
2. Can I get a home loan with a credit score of 690?
It is possible to get a home loan with 690 credit score. But it is advisable to apply a loan after achieving 700 score, this is because you may end up paying a substantially higher interest rate if you have a low score.
3. What is the minimum CIBIL score for a home loan in SBI?
The minimum CIBIL score for an SBI home loan is 700.
4. What is a good credit score for a home loan?
A good credit score of home loan application is 700. In the absence of a high credit score, the application may either be rejected or the applicant may have to pay higher interest rates.
5. Where to check credit score for a home loan?
You can check your score on the official website of the bank you want to avail the loan from. To check your credit score, you must visit the credit agency website or free credit score is available on many financial websites and apps.
6. Can you get a home loan with a credit score of 600?
You cannot avail a home loan with a credit score of 600. It is considered to be a poor score by the banks and the application may be rejected. Also, the loan availed might require payment of higher interest rates.